When an individual is overwhelmed with debt, he or she may not be sure which type of bankruptcy to file for. The choice between Chapter 7 and Chapter 13 can have major consequences for the individual, particularly in terms of what kind of assets he or she is able to keep and whether the individual will be forced to sell property. There are also significant differences in how each bankruptcy discharges a person’s debt and how long it takes to complete the process.
Chapter 7 bankruptcy is generally best for a person who has a limited income and who has only unsecured debt, such as credit card debt and personal loans. Chapter 7 eliminates (or discharges) these types of debt without requiring any repayment to creditors. In many cases, the person is able to keep all of his or her household belongings and automobile. However, the court can sell nonexempt property – property that is not protected by state-specific bankruptcy exemptions – to pay creditors. Even so, in practice, very few Chapter 7 cases result in the sale of any property.
In contrast, a Chapter 13 bankruptcy is usually best for people who have some amount of disposable income and who want to keep certain property. Chapter 13 reorganizes an individual’s debt into a payment plan that lasts for three to five years. It is important to note that individuals who file for Chapter 13 are required to make regular payments and will likely have to sell some property in order to repay their debts.
Both Chapter 7 and Chapter 13 bankruptcy halt all collection actions by creditors, including repossession, foreclosure, wage garnishment and creditor calls. However, a person will have to continue making payments on secured debt, such as mortgages and auto loans, while the case is pending.
While a Chapter 7 bankruptcy is typically much faster than a Chapter 13, the cost of filing for both is fairly comparable. There are fees associated with both bankruptcies, such as the filing fee and attorney’s fees. However, the cost of Chapter 13 is typically rolled into the reorganization plan that the person creates with the help of his or her lawyer.
In addition, while a Chapter 7 bankruptcy can be dismissed, a Chapter 13 case can be converted to another form of bankruptcy (e.g., Chapter 9) for two reasons: 1) because the circumstances of the debtor change so that Chapter 13 is a better option; or 2) the debtor fails to pass the “means test,” meaning that he or she does not qualify to file for Chapter 7.
Ultimately, the decision between Chapter 7 and Chapter 13 comes down to what the person wants, needs and can afford. The only way to know which option is right for a particular individual is to meet with a bankruptcy lawyer and discuss the situation. To find out more about what options are available, click here to use our free online screening tool or schedule a free consultation with an experienced bankruptcy lawyer.